What is the definition of "subrogation" in insurance?

Subrogation refers to the process by which an insurer, after paying a claim to its policyholder, has the right to pursue recovery of the costs from a third party that may have been responsible for the loss. This mechanism serves two primary purposes: it helps to reduce the overall cost of claims for insurers and ensures that the responsible party ultimately bears the financial burden for the damage or injury caused.

For instance, if an automobile insurance company pays for the damages to a policyholder's vehicle after an accident caused by another driver, the insurer can pursue that other driver or their insurance for reimbursement of the amount paid to the policyholder. This legal right of recovery not only helps keep insurance premiums in check but also reinforces accountability, as it encourages those at fault to take responsibility for their actions.

The other options pertain to different aspects of insurance and do not accurately capture the essence of subrogation, emphasizing its unique role in the claims process and cost recovery efforts within the insurance industry.